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Author: albaby1 Big gold star, 5000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8074  
Subject: CAPS is not meant to be a mirror of performance Date: 2/1/2007 12:01 PM
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There's been a number of threads that have pointed out (correctly) that the way that CAPS measures performance is different than real world performance. However, that's intentional - because CAPS is trying to measure the ability to pick outperforming stocks, not the ability to construct an outperforming portfolio.

The most obvious way to illustrate that is to consider two hypothetical players over the course of a year. Player A picks three stocks that rack up returns (relative to SPY) of +30%, -3%, and -3%. Player B picks six stocks that all outperform the index by exactly 5%.

Player B will have a much better CAPS rating than Player A. Player B has a score of 30 and accuracy of 100%, while Player A has a score of 24 and an accuracy of 33%. However, if you were to construct a portfolio of Player A and Player B's selections, it would be Player A who outperforms - Player A would return 8% more than the index, while Player B would only return 5%.

The reason? The market doesn't pay you any more for having picked multiple stocks that yield similar returns over a given time frame than it would for picking one stock that would yield the same returns. Investing $100 in a stock that gains 5% yields the same ending portfolio balance as investing $50 each in two stocks that gain 5% over the same time frame.

But since CAPS is trying to measure stockpicking, not portfolio performance, it does reward multiple accurate picks in a way that the market does not. It ranks the player who picks two stocks that each return 5% (always relative to the market) higher than the player who picks two stocks that return 10% and 0%, and both of them higher than the player who picks two stocks that return 12% and -2% - even though all would have the exact same returns in the market.

So yes - there are countless changes you could make to CAPS to make its rankings more reflective of how a real-world portfolio would perform based on the stock selections. Weighting picks, tweaking accuracy ratings - all would work. But those are beside the point - CAPS is a stockpicking game, not a portfolio managing game, and it's not intended to rank players based on how their stock picks would perform in the real world. It ranks them based on how correctly they make stock picks.

Albaby
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